Read: July 2023
Inspiration: Came across on Amazon’s bestseller list; familiar with Steve Cohen and his controversial reputation and wanted to learn about his background
Written with the help of ChatGPT, below is a brief summary to understand what is covered in the book.
“Black Edge”, published in 2017 by author and journalist Sheelah Kolhatkar, is a gripping exposé of one of the most significant insider trading cases in Wall Street history. The book unravels the scandal surrounding hedge fund manager Steven A. Cohen and his firm, SAC Capital. Kolhatkar delves into the culture of greed and secrecy that permeated SAC Capital and the lengths to which some traders went to gain an unfair advantage in the market. The narrative follows the relentless efforts of prosecutors and investigators to build a case against Cohen, culminating in the largest insider trading settlement in history. “Black Edge” sheds light on the inner workings of the hedge fund industry, regulatory challenges, and the broader implications of Wall Street’s pursuit of profit. It is a compelling and eye-opening account of the dark underbelly of high finance and the relentless pursuit of wealth and power.
Direct from my original book log, below are my unedited notes (abbreviations and misspellings included) to show how I take notes as I read.
Steve Cohen founded SAC 1992, prior to that went to Wharton, grew up without a lot of money, out of college went to trading boutique firm Gruntal, immediately impressed with instincts and successful trades, soon got own portfolio to manage, was a time of excess as Milken junk bonds opened door for tons of m&a and take privates in 80s which was what Cohen capitalized on early, December 1985 RCA deal with NBC was first trade Cohen subpoenaed and shook him, Oct 19 1987 was Black Monday where dow fell 23% and Gruntal effectively out of biz but Cohen known for ability to remain calm/confident, Cohen kept 60% of profits in his group, as market collapse Cohen continued to profit with shorts daily, started SAC 1992 with $23mm, by 1996 had $100mm+, very active trading so well liked by brokers, Steve got divorced from Patricia then remarried to Alex Garcia just as SAC ramped and she exerted control over him—he was a bit shy, not a people person, Kenny Lissak hired by Steve and became SAC general partner (more of networking type to balance with Steve), SAC doubling every 12 months but Steve well-being struggling—hired a therapist who would coach in office all employees but also spied for Cohen, SAC kept 50% of YE profits vs 20% industry standard, Kenny fired by Cohen Oct 1997 after random allegation from Alex that tried to instigate affair (Alex caused trouble at SAC and try to take power), by ’97 sheer volume of trades made SAC biggest revenue generator for Goldman and have directive to give SAC call on all analyst rec changes (not illegal necessarily but distasteful), by ’99 SAC surpass $1bn AUM, Steve a new billionaire, Cohen strived to be seen an smart investor not just trader so ’99 pivot to hire more fundamental edge people—ivy league types, Richard Grodin and CB Lee focus on semis, CB on ground in Asia getting info to give to Grodin which frustrate Cohen as Cohen was this intel to trade big, 2004 younger trader Grossman propose and get nod for more long-term investing unit of SAC—but focused on hiring people with connections to public companies, those well-networked to gain edge, 2006 was first when initial lawsuits began to grow vs SAC—biopharma company and insurance company claim SAC perpetuating fraud claims, investigations begin and Patricia spoke to investigating attorney about RCA incident 20 years prior—thought Steve had been dishonest to hide money from her, Grotin leave once Steve demand CB intel in 04, as 2008 crisis rise SAC had $17bn AUM and was at peak performance 30% annual returns with no big losses, by ’08 all at firm flaunted wealth, had Sunday Ideas Meeting where had 5 mins to pitch and say conviction level, Cohen had “execution traders” where would yell want he wanted to short/buy and they go to brokers no questions asked/no rationale to explain, brokers in dilemma on shorts b/c want biz of Cohen and commission but know Cohen always right so lose money on shorts, June 25 2008 Mathew Martoma healthcare trader at SAC begin massive position in pharma companies on Alz drug trials—tell Steve 9 on conviction for 2 companies with new trial data coming (9 was rare conviction level), had contact via Gerson Lehrman Group that connect public co execs to hedge fund people for millions (allegedly not for insider info), Dr Gilman from U of Mich was source who simply liked talking about Alz and drugs but money was nice too and got roped in—on board of these pharma review trials, confirmed side effect found in trial which was under Gilman NDA but divulged to Martoma (and gave lots of detail), built up billion dollar position in Elan (all hinged on drug, Wyeth position too but had other drugs), best healthcare analysts at SAC not understand/think catastrophic but Cohen not budge, white edge vs grey edge vs black edge were buckets of public vs debatable vs insider info, unhedged long position in Elan was risk but june 17 2008 initial positive read and pop then buy more up to $700mm stake in all, July 28 2008 was big Alz conference where announce final results of bapi drug, market continue to crash all around, 9 days before drug conference Martoma visit Gilman who showed him slided to be presented and see not as good as hoped—call cohen day after as thought stocks would crash and want to sell out, had to sell secretly and did so over 9 days up til annouce—then shorted $960mm of Elan, stock fall from $33 to under $10 on news drug failed and many ar SAC assumed lost millions, CR Instrinsic was “elite” research unit at SAC, Gabe Plotkin started at SAC also, SAC dropped 28% 2008 (only negative yr to date), BJ Kang was FBI agent who led insider investigations and began with wiretap on Rajaratnam’s fund—increasingly tie back to SAC people, Dave Makol was other lead agent, long process of flipping witnesses to ultimately try to catch Cohen but every time risked person tipping off Cohen, CB Lee (former SAC) and Ali Far had a fund and FBI get to them, help Kang, Lee explain how SAC operated with diff circles and Cohen at center, FBI also focus on “expert network” that got millions for knowledge such as PGR, Kang and Makol had bit of rivalry, Kang want CB to call cohen for job back to have wire and mole, Makol think had new person at SAC could flip instead, Aug 2009 Kang called SEC enforcement attorney Sanjay Wadhwa with tip on SAC pharma trade 2008 summer, SEC had a referral just had sat on re: Elan and Wyeth Alz trials with $182mm in profits and avoided losses, Oct 2009 Rajaratnam flying to London middle of night so FBI arrest him, same time Patricia file RICO lawsuit against Cohen for marital fraud/hiding assets $300mm damages, Martoma got $10mm bonus ’08 then struggle and lose money, Nov 19 2010 WSJ publish piece on FBI indider trading probe which change course of investigation as had lots of detail/targets, big leak for gvt, PGR named which spook many, prompted many to clear hard drives and shred papers, Nov 22 2010 Makol lead raid on Diamondback Capital hedge fund in Stamford led by 2 former SAC (left in 05 and close to Cohen), then raid Level Global which David Ganek founded after left SAC, then FBI get to Noah Freedman (former SAC) who implicated Donald Longueuil (also SAC)—all got inside info largely via PGR, enough to open investigation on SAC but need hard evidence, May 2011 Rajaratnam convicted and finally SEC lawyer also figure out Mathew Martoma and Gilman connection, May 2011 Sen Grassley letter became public on tips he received re SAC trades—Cohen’s team try to calm but Grassley step up pressure on SEC to investigate, bring in Martoma and Gilman (Martoma had background as fraud after kicked from Harvard Law for forging transcript), ultimately Gilman flip and confess (initially refused/skirted questions), March 2013 CR Intrinsic settle for $616mm on Elan (biggest SEC settlement for insider trading ever) but Cohen not named so still off the hook–bought $150mm art piece after to show still fine, SEC/FBI simulatenously pursuing Dell trade “2nd hand read” email, continue going after Cohen post-settlement, needed Martoma or Steinberg to flip, corp fraud on SAC was pursued as wait on evidence needed for insider trading—got to talk with Klotz/Cohen legal team, Klotz defense on Dell email was degree of separation b/w Cohen and original info source—which was true, tough to get Cohen so go for case against company SAC, through ’13 $2bn of $6bn of SAC outside client money withdrawn, $1.2bn new fine in guilty plea with SAC and US Attorney Office Nov 2013 but SAC immediately release PR to counter, $1.8bn total in fines, later in Nov was Steinberg trial, Horvath and Tortora testify against Steinberg, Steinberg convicted on all counts of insider trading in Dec, Martoma trial Jan 2014, Martoma refuse to turn on Cohen and found guilty on all counts, got 9 years in jail—speculation that Cohen would reward loyalty but no one know why not flip, SAC closed into $10bn family office and change name to Point72, Dec 2014 Preet Bharara rulings overturned on Diamondback and Level Global—said went too far on indirect info for insider trading and no exchange of money for info, through 2018 many insider cases dismissed/lightened, slap on the wrist, Cohen emerge unscathed really—still $10bn+ and could soon open new fund, gvt scared to lose so hesitate to prosecute individuals, Trump era increase lax approach and enable hedge funds to continue business as usual